Homer says ‘Doh’ to DOTAS

The recent announcement that IHT mitigation via transfers into trust is likely, in future, to be included in the DOTAS (Disclosure of Tax Avoidance Schemes) regime was received with some trepidation by advisers accustomed to assisting their clients with IHT mitigation.  In reality this proposal by the Treasury and HMRC is nothing more than was expected following the blocking in the Finance Act 2010 of two specific trust schemes which dramatically (and arguably artificially) reduced the value of assets gifted into trust.

Now that the coalition has nailed its IHT colours to the mast by freezing the Nil Rate Band (NRB) for 5 years it is backing this, much harsher than heralded, approach with supporting legislation to plug as many leaks as possible.  The consultation document introducing the DOTAS requirement does not seem unreasonable in the circumstances and certainly does not impact on most conventional IHT mitigation work using the various trust schemes which are widely available.  What is being suggested as far as disclosure is concerned?

The new rules will not require any existing schemes well known to HMRC (such as flexible and discounted gift schemes) to register because they are being ‘grandfathered’ in to acceptability.  Looking forward it will only be new trust schemes which (a) involve chargeable transfers beyond the donor’s current allowances, including any unused NRB – in other words where property becomes ‘relevant property’ – AND, (b) which involve an ‘advantage’ in relation to the IHT entry charge – an advantage being defined as the avoidance, reduction or deferral of a charge – which have to be registered.

This avoids any requirement to disclose straightforward situations where an individual simply transfers property into trust and relief or exemption is available in the same way it would have been had the property been gifted directly to another individual.  This is generally the case with most of the current crop of trust-based mitigation arrangements.  The proposals are only at the consultation phase so it is too early to be unequivocal about the requirements for plans launched in the future.  However the grandfathering facility will ensure that all existing plans of which HMRC are aware – and future plans which adopt the same principles as existing plans – will be quite safe.  In fact this is the nearest we have ever come to having a blanket approval from HMRC of all existing plans.

What does this mean for tax planners and their clients going forwards?  Well we should start by considering the position of taxpayers who have been relying on either the indexation of the NRB or, more recently, the Tory commitment to a transferrable £1m NRB, to lift them out of potential liability.  I think this is bad news for such optimists.  It is clear that a Lib-Con coalition government has a rather less generous approach to inherited wealth than that promised by the Tories.  Freezing the NRB for 5 years when the knock-on impact of ‘quantitative easing’ (printing money) is likely to be rampant inflation down the line is really quite serious.  I think most readers will agree that inflation is already rearing its ugly head no matter what interest rates are doing.  Looking further ahead there has been plenty of speculation that the coalition might well continue through until another term of government – especially if next year’s referendum delivers backing for the Alternative Vote electoral model.  This will mean a continuation of a cautious approach to raising IHT allowances.

The following chart shows the value of the NRB compared with assets starting at the same value rising with inflation.

This means that taxpayers currently on the cusp of a potential IHT liability will be severely disadvantaged by the freezing of the NRB – assuming inflation of 4% over the next 2 years followed by 8% for 3 years.  Readers may doubt such a scenario but not if they are German historians!  In the situation shown, a potential liability of nil at the beginning would become a liability of some 40% of £117,814 (tax of £47k+) after 5 years, simply resulting from inflation.

This brings me on to a favourite phrase of my IHT planning friend, Nick Chadwick, who constantly reminds taxpayers to ‘hope for the best but plan for the worst’.  This has served him well over several decades of capital tax planning and, I suspect, he will be proven right yet again!

So the message here is that all those advisers and their clients who, since 2008 when they were given false hope by the posturing of Alistair Darling and George Osborne, have put off their IHT mitigation planning, have no time to lose.  Since many of these people are relying on multiple use of the NRB, every day is important in clocking up those 7 year inter vivos periods.  Remember – hope for the best but plan for the worst – start your IHT mitigation planning today.

Paul Wilcox,
Chairman & Technical Director, WAY Group
9th August 2010

Posted on 9th August, 2010 | Tags: HMRC, IHT Mitigation, Nil Rate Band |
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Don’t sit on the fence – you’ll only get splinters!

With at least one budget and at least one election in prospect for 2010, WAY Investment Services Ltd’s Technical Manager Mark Benson says that there is no time to delay before putting in place IHT mitigation plans for your clients. Given the average gestation period of an IHT case from agreement to settlement and with the (first) budget possibly a month away, the time to start is really today.

A recent IFA enquiry caused me to open the file of a WAY Inheritor Plan settled in February 2004 with an investment of £1,100,000. A number of thoughts sprung to mind such as how growth of over £300,000 in the investment value since then is safely out of the estate of the settlor and thus not subject to IHT on their death, and how in a year’s time the whole trust fund should also fall out of the estate at the end of the 7 year inter-vivos period. The overriding thought that came to mind however was “£1.1m transferred into a flexible trust – those were the days!” Whilst cases of such a size are unfortunately rather rare, it is interesting to reflect on how easily planning could be put in place for such amounts prior to the surprise change to the IHT rules in the 2006 Budget, which shut the door on PET based transfers to discretionary or interest in possession settlements. Nowadays unfortunately our settlor could not put much more than the amount of growth they have enjoyed into trust without breaching the nil rate band and generating a lifetime IHT charge of 20%.

There is a cautionary tale here as 2010 promises to be something of a white knuckle ride for tax planning as the political parties try to balance the challenge of dealing with the financial crisis with the desire to be generous in their manifesto promises ahead of the election. What is certain is that we must have one budget and one election this year. However, whilst May 6th remains a solid favourite for the date of the election – in particular since local elections are already scheduled for that day and cash-strapped local authorities could do without paying for two polls within a few weeks – the odds on the Conservatives as favourites to win that election have lengthened somewhat as the opinion polling shows a narrowing of their lead. With the likelihood of a change of government and the possibility of a hung parliament we cannot discount the possibility of at least one more budget and perhaps one more election this year.

When considering the dismal state of the nation’s finances and the unconvincing emergence from recession, it would seem that there is one thing we can be certain about: The forthcoming budget(s) will make the tax code more hostile to our clients’ income and capital. It is possible that the availability of trust based IHT planning might be attacked itself, akin to the changes introduced in 2006. Moreover there is also the strong possibility that an unfavourable change to the rate of income tax, CGT or IHT would dilute the savings on offer. Some may argue that the Conservatives have pledged to increase the IHT nil rate band to £1m in the first term of a prospective government, however we feel that given the fiscal challenges that lie ahead this might be a policy that remains an aspiration only. Any prospect of a first term introduction surely lies nearer the last year of the parliament.

The prospect for the next few years is that IHT will remain a challenge to succession planning, and if another aggressive attack on the use of trusts is made we might in time look back on the present as another golden opportunity that has passed. Where clients are hesitant to put plans in place due to the uncertain future, their minds can be put at ease by the recommendation of flexible arrangements such as the WAY Inheritor Plans. Our plans can adapt to the client’s changing circumstances by granting flexible powers to the trustees and also to changes to the rates of lifetime taxes by (uniquely in the market) offering access to collective investments and offshore bond wrappers. Furthermore, since clients are limited to investments within the nil rate band it is necessary to start at a younger age and (hopefully) make repeated use of the nil rate band over the years to come.

At some point in 2010 a government will face up to the reality of our financial crisis and present the bill for the remedy to taxpayers.  Those still sitting on the fence at that time will suddenly feel the splinters!

Mark Benson, TEP CertPFS,
Technichal Manager, WAY Investment Services Limited.
19th February 2010.

Posted on 19th February, 2010 | Tags: IHT Mitigation |
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Still strong reasons to run adviser funds

New guidelines on distributor influenced funds are designed to ensure customers are treated fairly and should not prevent advisers from offering their own portfolio-style collective funds.

Access to financial advisers’ own portfolio-style funds can bring benefits for clients. I outlined these benefits in a previous article, which struck a chord with a number of discretionary investment managers, some of whom already run such funds and many who do not but would like to.

Several firms have expressed concerns about the cost, inconvenience and responsibilities of taking this path, as well as the imminent impact of the retail distribution review (RDR) and the alleged negative attitude of the Financial Services Authority (FSA) towards ‘distributor influenced funds’ (DIFs).

Having been involved with DIFs since 1991, I am an avid fan of delivering discretionary investment management to clients via the most effective means: collective investment. What I mean here is delivering sound, bespoke, portfolio-style management via the most cost-effective and tax-effective route by pooling clients’ assets into collective funds.

One size does not fit all, so you will have to supplement this approach by:
(i) having more than one single strategy (fund) to suit different risk appetites and possibly capital and income objectives;
(ii) being prepared to supplement such core solutions with more specialised investments to finely tune each client’s individual portfolio solution.

Two advantages of adviser funds
There are two key arguments for clients entrusting their investment funds to their advisers’ own portfolio-style funds. First, there is far more accountability: the client can meet face-to-face with a good local and personal investment team for regular reassurance about the style and substance of the management.

Second, a good portfolio manager is not the same as a good fund manager. A portfolio manager is running portfolio substitutes and therefore has a keener eye on the overall risk aspects of managing the client’s money. A specialist fund manager works to tight specifications of where they can invest and to what extent they need to maintain liquidity.

The most recent regulatory changes have allowed collective funds to mix and match underlying funds and direct equity investment, and to blend a much wider range of asset classes. This means contemporary portfolio-style funds can effectively mirror and replace virtually any bespoke portfolio.

The right firm for the job
Several firms service the third party fund market. Some are investment management firms, which tend to have more empathy with their guest managers, and others are administration companies, which focus on large scale administration activities. Either type of firm is likely to be able to guide new entrants through the steps needed to establish their own funds.

Whether a firm should embark on this is broadly down to a handful of criteria:

* Are they authorised to perform discretionary management or do they have an associate company who is?

* Do they have sufficient clients and assets under management to make the establishment of such funds a viable proposition for all parties, especially the clients themselves?

* Is there adequate understanding of the regulatory issues involved in running such funds?

* Are such funds likely to survive the commission-free/remuneration policies expected from the final guidelines to come out of the RDR?

* Do the funds comply with FSA guidelines on DIFs?

Support network is growing
A new trade association for companies associated with running their own portfolio-style funds, the Investment Funds Association, is a source of contact and support for its members and a centre of influence with the regulator. The nascent body (ifassociation.co.uk) has a growing membership that includes service providers, and many advisers who run their own branded portfolio-style funds. It may well become an essential forum for parties interested in this sector of the funds industry.

The target of regulations
The FSA has made it clear that its new guidelines on DIFs are not aimed at fund managers, collective scheme operators or private client investment managers whose investment management is central to their business proposition. These groups are already well regulated. They may be affected by the guidelines on DIFs, however, if their appointment as manager or their ongoing investment approach or accountability is under the control of the distributor of the funds in question.

The guidelines focus on several areas of responsibility that together ensure advisers are treating their customers fairly. In essence an adviser must be demonstrably competent, will be aware of, and will manage, any conflicts of interest, is obliged to be independent and deliver only suitable solutions, and must communicate all of these considerations to the client. Included in these issues will be those relating to costs and remuneration.

If this sounds off-putting then take heart: what is genuinely in the best interests of clients will undoubtedly pass muster with the FSA.

Nothing to fear
Regulation on DIFs is there to assist and protect clients and not to deny them the most effective and contemporary investment management solutions.

The regulator has an unenviable task of weeding out the incompetent, unethical or lazy among us. The competent, professional, ethical and conscientious adviser has nothing to fear.

The establishment of well-managed, portfolio-style collective funds will be a major benefit to all participants, advisers as well as clients.

Paul Wilcox,
Chairman & Technical Director, WAY Group.

Posted on 10th December, 2009 |
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